In the new issue of Regulation, economist Pierre Lemieux argues that the recent oil price decline is at least partly the result of increased supply from the extraction of shale oil. The increased supply allows the economy to produce more goods, which benefits some people, if not all of them. Thus, contrary to some commentary in the press, cheaper oil prices cannot harm the economy as a whole.

Two long wars, chronic deficits, the financial crisis, the costly drug war, the growth of executive power under Presidents Bush and Obama, and the revelations about NSA abuses, have given rise to a growing libertarian movement in our country – with a greater focus on individual liberty and less government power. David Boaz’s newly released The Libertarian Mind is a comprehensive guide to the history, philosophy, and growth of the libertarian movement, with incisive analyses of today’s most pressing issues and policies.

Archives: 07/2011

Today, the Government Accountability Office will release a new report on fraud in Medicare and Medicaid. By my count, it is the 159th report the GAO has issued on fraud in these programs since 1986. According to the Associated Press:

The federal government’s systems for analyzing Medicare and Medicaid data for possible fraud are inadequate and underused, making it more difficult to detect the billions of dollars in fraudulent claims paid out each year, according to a report released Tuesday.

The Government Accountability Office report said the systems don’t even include Medicaid data. Furthermore, 639 analysts were supposed to have been trained to use the system - yet only 41 have been so far, it said.

The Centers for Medicare and Medicaid Services - which administer the taxpayer-funded health care programs for the elderly, poor and disabled - lacks plans to finish the systems projected to save $21 billion. The technology is crucial to making a dent in the $60 billion to $90 billion in fraudulent claims paid out each year.

In this article for National Review, I explain that there are reasons why those tools are, and will remain, “inadequate and underused.”

Want to understand a big chunk of what Washington, D.C. does? Learn about “moral panic.”

Moral panic is a dynamic in the political and media spheres in which some threat to social order—often something taboo—causes a response that goes far beyond meeting the actual threat. It’s a socio-political stampede, if you will. You might be surprised to learn how easily stampeded your society is.

Take a look at H.R. 1981, the Protecting Children from Internet Pornographers Act of 2011. It’s got everything: porn, children, the Internet. And it’s got everything: financial services providers dragooned into law enforcement, data retention requirements heaped on Internet service providers, expanded “administrative subpoena” authority. (Administrative subpoenas are an improvisation to accommodate the massive power of the bureaucracy, and they’ve become another end-run around the Fourth Amendment. If it’s “administrative” it must be reasonable, goes the non-thinking…)

This isn’t a bill about child predation. It’s a bald-faced attack on privacy and limited government. Congress can move legislation like this, even in the era of the Tea Party movement, because child predation is a taboo subject. The inference is too strong in too many minds that opposing government in-roads on privacy is somehow supporting child exploitation. Congress and its allies use taboos to cow the populace into accepting yet more government growth and yet more surveillance.

I’m not turned to mush by taboos, so the question I’m most interested in having asked at tomorrow’s hearing on the bill in the House Judiciary Committee is: “Under what theory of the Commerce Clause is this bill within the power of the federal government?”

Adm. Mike Mullen, the chairman of the Joint Chiefs of Staff, is off to China for discussions with Chinese military officers. His trip follows a visit in May by China’s army chief of staff. The discussions are valuable since they will help increase transparency, if nothing else. But they won’t do much more if Adm. Mullen doesn’t bring the right message.

While the admiral is in China the U.S. Navy will be holding exercises with Australian and Japanese forces in the South China Sea. Although the number of ships involved is few, the maneuvers are meant to send a message to Beijing about its controversial territorial claims, which would turn much of these waters into a Chinese lake.

Washington has many issues at play with China—the status of Taiwan, trade and currency disagreements, support for North Korea, status of human rights, policy towards Iran. If the U.S. and People’s Republic of China cooperate, the 21st century is likely to be far more peaceful and productive. If the two nations confront each other, the future could turn ugly.

The ultimate question is whether Washington is prepared to accommodate a wealthier and more powerful PRC in coming years. Contrary to the fevered claims of some, the shift in global power likely will be gradual, not abrupt. The U.S. will remain richer, more influential, and possess a better military for years, if not decades. Indeed, China faces significant economic and political challenges and will be poorer than America even as its GDP grows larger.

However, while the speed and process of China’s rise is not guaranteed, its ability to deter U.S. military intervention will expand. Beijing’s outlay of $100 billion to $150 billion a year on the military already raises alarms in Washington, even though the latter devotes about $700 billion to “defense.” The reason? It is much cheaper for the PRC to defend itself than for the U.S. to sustain an offense capable of imposing Washington’s will on China. Beijing doesn’t need to build 11 carrier groups. It just needs the ability to sink American carrier groups.

Even if a new policy of containment seemed affordable, it still would not be in America’s interest to scatter military tripwires throughout East Asia. Americans obviously will remain very involved in Asian affairs. But alliances should be a means to an end, namely defending the U.S. Alliances should not become ends in themselves. It is hard to imagine what likely dispute—such as whose claim to the Paracel Islands is paramount—would justify the U.S. risking war with an increasingly well-armed nuclear PRC over issues the latter considered vital in its own neighborhood. Consider how Washington would react to Chinese military intervention in Central America.

The better approach would be to encourage friendly states to do more on their own behalf. In fact, that is already happening to some degree.

Japan is slowly moving beyond the strict limitations of Article 9 of its constitution, which technically bans a military. South Korea has begun looking at security beyond North Korea. Australia has embarked upon an ambitious security program. Several Southeast Asian nations have begun purchasing submarines and improving their militaries. All see, and generally fear, the specter of a rising, hostile China.

This process would be accelerated if Washington made clear that it planned to step back and would no longer act as the meddler of first resort. Countries must look after their own interests instead of automatically looking eastward for aid.

Adm. Mullen’s message in the PRC should be simple. China has gained much from its peaceful participation in the international system. Beijing will gain even more in the future if it continues the same strategy. If, however, it chooses aggressiveness over assertiveness, the PRC will have much to fear, and perhaps more from its own neighbors than America.

Sunday’s New York Times Magazine has an interesting exit interview with Sheila Bair, who until this past Friday served as Chair of Federal Deposit Insurance Commission (FDIC). While I haven’t always been her biggest fan, I did find it refreshing to hear a bank regulator state the obvious: we should have let Bear Stearns fail. As she puts it:

Bear Stearns was a second-tier investment bank, with — what? — around $400 billion in assets? I’m a traditionalist. Banks and bank-holding companies are in the safety net. That’s why they have deposit insurance. Investment banks take higher risks, and they are supposed to be outside the safety net. If they make enough mistakes, they are supposed to fail.

I’d be hard-pressed to say it better. Assisting the sale of Bear to JP Morgan created the expectation that anyone larger, like Lehman, would be assisted as well. Perhaps the most interesting part of the interview is that Bair gets right to the heart of the matter: the treatment of bondholders. ”Why did we do the bailouts?” Bair states “It was all about the bondholders.” Again she couldn’t be more correct. If there was anything Dodd-Frank should have fixed it was this, ending the rescue of bondholders and injecting market discipline back into bank. It is also refreshing to hear her admit: ”I don’t think regulators can adequately regulate these big banks, we need market discipline. And if we don’t have that, they’re going to get us in trouble again.”

Where I disagree, besides her misguided take on mortgage re-sets, is whether Dodd-Frank will actually impose losses on bondholders. Bair expresses some optimism that such is the case, but there are just too many holes in Dodd-Frank to make that believable. Plus you pretty much have the same set of rules in place for Fannie Mae and Freddie Mac, yet the last time I checked the bondholders are still being protected at the expense of the taxpayer. If we don’t impose losses on Fannie creditors, even now after the panic, what makes anyone think we will do so to Citibank. Section 204 of Dodd-Frank is quite clear that the FDIC indeed retains the power to rescue creditors. Something that Bair was willing to do during the crisis, even if pushed to do so by Tim Geithner. Despite some errors, the interview is really a worthwhile read and has some real lessons for avoiding the next financial crisis.

Yesterday Mario Rizzo pointed out a couple of new studies on the unexpected results of paternalist policies designed to “nudge” Americans into making what their betters consider smart decisions. In today’s Wall Street Journal, Energy Secretary Steven Chu sums up the paternalist view very concisely. Opposing a House bill to repeal the 2007 federal law that effectively outlaws incandescent light bulbs, Chu says:

We are taking away a choice that continues to let people waste their own money.

Exactly. The government wants to take away our choice. It wants to take away our right to make our own decision. It doesn’t trust us to make our own choices. And why should it? Secretary Chu won the Nobel prize in physics. He’s obviously smarter than we are.

Sure, some people just don’t like fluorescent light. Some people don’t like the way the new bulbs come on slowly. Some people don’t like the curlicue look. Some find that they don’t in fact last longer than incandescent bulbs. Some are skeptical about promises of long-term savings, or simply prefer to spend less now.

But none of that matters to Secretary Chu and other paternalists. They know that these bulbs are best for us, and so they “are taking away a choice” that they don’t think people should make. That’s the difference between the libertarian and paternalist views in a nutshell.

Amidst the wrangling over a debt deal between the White House and Congress, the most interesting movement pertains to military spending. Several reports today suggest that up to $700 billion in military spending cuts is under consideration, which would amount to a bit more than 10 percent less than current projections over the next 10 years. A more realistic bottom line might be $300 billion, which could be achieved by allowing the budget to grow at the rate of inflation (in other words, no real cuts in spending).

As always, the devil is in the details. From what baseline? Over what time period? Would the cuts apply only to the base DoD budget, or all national security spending, including the costs of the wars, as well as the budgets for the Departments of Homeland Security and Veterans Affairs? Most important is timing. If the savings are all backloaded in the out years, they may never materialize. Today’s budgets project spending out five or 10 years, and the “savings” really just amount to a new set of projections against that baseline. Plus, these agreements are rarely binding on future congresses; a different cast of characters will be responsible for passing DoD appropriations bills in 2018 or 2020.

One thing is clear, however. People here in Washington are now considering military spending cuts that they thought strategically unwise and politically impossible just a few years ago. And conservatives are joining in. South Carolina Republican Mick Mulvaney offered an amendment to the DoD budget appropriation bill that would have frozen spending at 2011 levels, a $17 billion cut below the amount voted out of committee. Meanwhile, three Democrats and three Republicans co-sponsored an amendment to cut the proposed increase in the FY 2012 budget in half, generating savings of $8.5 billion. The bad news for taxpayers is that both amendments failed. The good news is that some in the GOP are starting to match their rhetorical zeal for spending cuts with actual votes that do so; 43 Republicans voted for both measures. (h/t DSM)

It is no longer credible to declare military spending off limits in the search for savings, and most Americans understand that we can make significant cuts without undermining U.S. security (William Kristol being one of the predictable outliers).

I’ll hazard a prediction: I think that military spending in FY 2012 will be slightly less than President Obama initially requested, but still not less than will be spent in FY 2011 (in other words, they’re still only faking cuts).

To get real cuts, Washington is going to have to clear some things off the military’s plate. If we want a military that costs less, we have to ask it to do less. And I don’t see a lot of enthusiasm for that—yet. Starting a new war in Libya (and signaling that similar missions are in the military’s future) doesn’t help.

Perhaps the key will be to connect two seemingly disconnected dots: our subsidizing defense spending for other rich countries has allowed them to divert money to dubious social spending and a too-large public sector with too-generous pay and benefits. I don’t know how Republicans (or Democrats, for that matter) can go to their constituents and say they’re cutting popular programs here in the United States, and holding the line on the DoD’s budget, so that our European and East Asian allies can fend off cuts in their pensions and avoid taking responsibility for their own security.